Counterparties: Suddenly no one likes austerity

If you believe today’s host of reports, there’s been a sudden transformation in Europe. More than two years into a sweeping austerity project, European leaders are reportedly rethinking the idea that budget cutbacks can magically fix the continent’s dreary economy.

The commentary today borders on the breathless. “From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too,” the NYT declares. Henry Blodget, for his part, has settled decades of scholarly debate: “IT’S OFFICIAL: Keynes Was Right”. At Zero Hedge, Peter Tchir, calls it “The Day Austerity Died.”

How’d we get here? In France, Socialist presidential challenger François Hollande has indicated he’ll challenge austerity; the Dutch government yesterday collapsed over economic reform; and tomorrow, we may learn that the UK is back in a recession. The latest Eurostat numbers, meanwhile, are troubling. Greece, Portugal and Spain significantly reduced their respective budget deficits in the last two years, without anything resembling strong economic growth. In a back-of-the-envelope calculation of the same figures, Paul Krugman estimates that “1 euro of austerity yields only about 0.4 euros of reduced deficit.”

Angela Merkel, austerity’s great champion, is already pushing back against the austerity backlash, arguing that the “credibility” of the eurozone is at risk without continuing cutbacks. But as Matt O’Brien wrote last week, the market isn’t just worried about budget credibility, it’s worried about Europe’s credibility as an engine of economic growth. Credibility, after all, comes after results.

EU Mess
Europe begins to revolt against Germany-prescribed austerity – NYT
Spain reaches target in short-term debt sale, but its rates soar – Reuters
The “pain in Spain” could hit the world economy – WashPost
The tale of banking in the land of Italia – FT Alphaville
“The above statement shows why austerity is simply one of the dumbest policies on the planet” – Bonddad Blog
Five things you can say in French elections but not in American ones – Wonkblog

Housing
Shiller: We could all be dead before we see a housing rebound – Reuters